The Credit Suisse bailout in hindsight: not a bitter pill to swallow, but a case to follow

Abstract

AbstractIn March 2023, Credit Suisse (CS) was bailed out based on the implementation of emergency law to the exclusion of all shareholder rights of the involved banks, likely violating basic principles of monetary order. However, this paved the way for a support plan amounting to 209 billion Swiss francs and the implementation of a state-orchestrated emergency merger with UBS. By the end of August 2023, UBS had fully paid back the support plan and reported the biggest-ever quarterly profit for a bank, amounting to 29 billion US dollars. UBS also started to absorb CS’s domestic business, thereby abandoning the branding of an institution with a history of 167 years. Popular accounts claim the plan could be considered a success and that there was no cost because the money was repaid. We critically evaluate the CS bailout, shedding light on key issues such as bailout-induced wealth transfers, the “too-big-to-fail” challenge, the likelihood of bank bailouts, the optimal level of bank equity, the doctrinal separation of solvency and liquidity, and the benefits of ex-ante market-based bank fragility indicators rather than ex-post accounting indicators. We infer a financial economist’s perspective, in which supervision is expanded by ex-ante market-based risk indicators, unweighted capital ratios are increased to adequately reflect large bank risks, and ex-ante paid liquidity options are introduced. Finally, we call for a public debate on the willingness of taxpayers to implicitly finance the too-big-to-fail risk of large banks.